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— Rajaa Moini

Special report: Breaking down the budget for the new fiscal year

The special edition of Business and Finance breaks down and looks at the impact of the govt's budget.
Updated 14 Jun, 2021 04:03pm

The forgotten middle class

By Afshan Subohi

The budget serves the classes on the two extremes of the social scale, but offers little to households in the middle.


For ordinary people, sifting facts from fiction in the haze of jargon and big numbers is hard. They can still tell if a budget helps or hurts them. The test is simple: the impact on their pockets. The current budget may not be ideal, but with the Covid-19 fallout and the International Monetary Fund (IMF) breathing heavily down our neck, it could have been worse. A surfeit of assumptions on the revenue side, however, raises questions about the viability of budget pledges.

The expanding free vaccination drive and the receding third wave kindle hope that the worst might be over for Pakistan. You need not be a social scientist though to sense that the last year washed away much of the gains in living standards common Pakistanis achieved while struggling painstakingly over the years.

The economic growth excluded average households. The Pakistan Economic Survey 2020-21 is silent on poverty and joblessness levels, but private projections suggest some 50pc of middle-class families were pushed to the edge amidst high inflation and falling incomes. The claim of the government that only 0.2 million (of 20m pushed out of the job market in the pandemic) remain jobless is not convincing.

All in all, it sounded like an election-year budget with the promise of something for everyone. Much will depend on how quickly the private sector translates incentives into GDP growth propelling investment. Their track record fails to inspire confidence. The investment-to-GDP ratio fell to 15.1pc from 15.3pc last year despite stimulus. The government has deviated from the IMF-set path in the budget. If the IMF decides to end the programme, as a consequence, it will multiply challenges for the country.

In 2021-22, the government will have to follow the repayment schedule as the deferment facility expires. The import bill is expected to rise as oil becomes dearer in the world market and demand for imports picks up. Unless the government has some other secured revenue streams, fears of a mini-budget are not misplaced.

In sharp contrast to the last two PTI budgets, the thrust in the latest one is towards growth, relief and confidence-building. The budget, however, serves the classes on the two extremes of the social scale more than it serves the big percentage of households in the middle.

A slew of measures respond to the demands of the corporate sector while the stronger Ehsaas programme promises relief for the poorest of the poor. Concerns of the middle class on jobs, falling incomes and price hikes did not get sufficient attention in the budget.

The expected higher petrol price will accelerate inflation and further strain family budgets. Kitchen, transport, utilities and education spending will increase as life limps back to normalcy. Rent, income tax, health and miscellaneous spending may not change, but the scope of personal savings will shrink.

Deflecting the donors’ pressure, Mr Tarin enhanced development spending. The Public Sector Development Programme is jacked up by 38pc to Rs900bn. To deal with the Covid-19 crisis, Rs170bn is set aside for vaccine procurement. The allocation for Ehsaas programme has been raised to Rs260bn from Rs208bn last year. Salaries and pensions of government employees have been raised by 10pc. Several schemes of subsidised loans have been announced for youth, women and farmers as well as skill development and housing sectors.

No new taxes have been levied. Neither have their rates gone up. The government intends to achieve a higher tax revenue target through administrative efficiency. The regressive nature of the tax regime was acknowledged by the finance minister, but he allowed it to be further skewed by raising the share of indirect taxes to 68pc in budget proposals from 66pc last year.

Coping with the pain, fear and demands of social adjustments in the pandemic has already exhausted many. The outgoing year of vanishing jobs, falling incomes and price hikes has taken its toll. They wanted the government to nudge employers to create jobs and increase salaries in these nerve-shattering times.


The art of mixed signals

By Mutaher Khan

For the country at large, the key change regarding telcos is the reduction in withholding taxes by 2.5 percentage points.


If giving out mixed signals was an art, the Pakistani government would have been the Majnu bhai of it. The latest display of this artistry came on Friday when the finance ministry’s budget document and speech proposed new taxes on voice, messaging and data. Unsurprisingly, the backlash began against the stupidity of charging Rs5 fee for every gigabyte of data usage and how regressive the move is.

Quickly gauging the reaction, the Minister for Industries and Production — who the world of economics owes heavily for his groundbreaking research methodology on averaging out inflation over 13-month periods — tweeted that the prime minister and cabinet did not approve the federal excise duty levy on data internet usage. Great way to distance yourself from the official documents of your own government! By the same night, Jazz Pakistan’s CEO posted on Twitter that Ishrat Hussain confirmed to him that this would not be included in the final Finance Act. Good riddance, but I wonder how this needless drama could have been avoided in the first place?

Anyway, let’s leave the politics of that for now and turn to economics. While the initially proposed FED is history now, informed industry sources confirmed that it would have been applicable to only Islamabad Capital Territory, and not the provinces.

For the country at large, the key change regarding telcos is the reduction in withholding taxes by 2.5 percentage points. Plus, the fixed fee (of Rs250) on the issuance of new SIM cards has been proposed to be deleted, which was being borne by telecom operators since the price wars began. Based on the number of subscribers added from July to March FY21 in the country, this measure would have offered a relief of Rs3.47 billion to the overall industry.

But all of this is telecom, which is relevant from largely the access and connectivity point of view. For the technology industry specifically, main developments in the budget can be seen in the arena of digital payments where a couple of forward-looking measures have been included. For starters, “payment on account of Merchant Discount Rate is proposed to be excluded from the purview of federal excise duty.”

To explain in English, whenever you pay through a digital channel — be it an e-commerce transaction or swiping a card at a supermarket’s point of sale machine — the merchant is charged a discount rate, usually around 1.5-2 per cent. Say the amount was Rs100 for a chocolate bar, the seller would in essence receive Rs98-98.5. The remaining chunk is paid out to the intermediaries who helped process the payment and can include a number of players, such as the card issuer, settlement bank or gateway.

However, this merchant discount rate wasn’t it. There was actually a federal excise duty of 16pc on top of this cut, so someone paying out Rs2 was in essence being charged Rs2.32. It’s this percentage that’s being removed, thus making digital payments slightly cheaper and hopefully more attractive to the seller.

But...there’s always a but. There is still a lack of clarity on how this will be applied since this FED was applicable to only the Islamabad Capital Territory and other federal areas. Provinces have their own sales tax similar to this levy, which at least for now continues to be. The confusing bit is how the transactions will be treated between these different tax jurisdictions and who will lay claim to the proceeds: would it be the authority from the place where the sale has occurred or where it is processed from? Maybe a third or fourth option? That will eventually come down to the consensus (or the lack of) between Interprovincial Revenue Coordination.

On point-of-sale specifically, the budget has proposed a tax credit scheme on the import of terminals. According to Ali Islam, Business Development Head at Keenu, around 30pc of the machinery cost is taxes. It remains to be seen if the move would help increase the number of PoS stations in the market, which have grown at a compounded annual growth rate of around 8pc since 2013 to stand at 62,480 by 2020 end.


A hit and miss for farmers

By Ahmad Fraz Khan

Can the paltry figure of Rs12bn, out of the total layout of Rs8.4tr, sustain the sector let alone revive it?


Despite the immense interest expressed by PM Imran Khan for the revival of agriculture, the budget has missed more areas than it mentions. For example, farmers demand revamping of research. The budget seems to have completely missed it.

The cotton crisis has taken space in the national debate in the last few years and its dip to an exceptionally low level had rekindled hopes, egged by official responses, that the government was determined to revive cotton glory. The budget document has completely ignored the subject. Rather, it allowed cotton fibre import, hurting revival prospects.

Conceptually, the exercise looks like an extension of the prime minister’s “Transformational Plan for Agriculture Revival” being executed since 2019. The government attributes last year’s performance of crops to this plan, discounting the role of weather that all experts think played a crucial role. They, however, do give credit to the plan for improving the political economy of wheat and sugarcane.

The finance minister’s speech carried Rs12 billion allocations for the sector from which locust attacks and food security would receive Rs1bn. About Rs2bn are allocated for productivity enhancement, another Rs1bn for oil (crop) cultivation — reads olive initiative — and Rs3bn have been set aside for watercourses improvement. Can this paltry figure, out of the total layout of Rs8.4 trillion, even sustain the sector, let alone revive it?

This is a question that would haunt the sector for the next entire year. On the development expenditure sheet, Rs77bn are shown under the agriculture sector head. Last year, this figure was Rs99bn and actual expenditures shown for last year were Rs82bn. So, the allocation for this year is Rs5bn less than what has actually spent on the sector — hardly a propitious sign for sectoral revival. Will a small amount be able to ensure 3.5 per cent for the sector during the next 12 months? Probably not.

Khalid Khokhar of Pakistan Kissan Ittehad, however, is happy that the prime minister’s last-minute intervention has saved farmers from the general sales tax on all inputs, which could have added to the cost of production correspondingly and further destroyed the sector. It was being levied under pressure from the International monetary fund but the prime minister intervened at the last moment to save the day for farmers and farming. However, Mr Khokha is unhappy because nothing is done for research despite the consensus demand by the farming community. With determination and money both missing, not only is revival impossible, sustainability is questionable as well. Not a good sign for the sector.


Challenges in the external sector

By Mohiuddin Aazim

The external debt financing requirement for 2021-22 will be higher than it was in the current fiscal year.


The federal budget aims at achieving 4.8 per cent GDP growth in the next fiscal year. This cannot happen without allowing imports to grow faster. The government has already decided to cut additional customs duty and regulatory duty on 3,000 types of import items, including industrial raw materials and intermediate goods. This means the average monthly merchandise import bill that stood below $4.6 billion in 2020-21 will likely shoot up to $5bn or even higher in 2021-22 if we also factor in the possible increase in the imports of finished consumer goods on the back of higher economic growth.

Next year, we need $60bn to finance imports. But the target set for next year’s merchandise exports is $26.8bn. Where will we get enough foreign exchange to fix the trade deficit of $33.2bn?

The obvious answer is: home remittances. Policymakers hope that this year’s total estimated remittances of $29.3bn will rise further to $31.3bn next year. But if imports are to reach $60bn, even exports and remittances together cannot match that level. For the government, it’s not a problem. It says the trade deficit will be lower as the import bill will be $55bn.

Now there lies the problem. Year after year, Pakistan has missed macroeconomic targets by wide margins. But when it comes to making initial estimates at the start of a new fiscal year, it always forgets this fact.

The external debt financing requirement for 2021-22 will be higher than it was in the current fiscal year

Merchandise imports in the first 11 months of 2020-21 have crossed the $50bn mark and are on their way to reach $55bn for the full fiscal year ending in June. But our policymakers still believe they can keep the import bill at the same level next year, and that too amidst higher economic growth and after reducing import duties.

This overoptimistic thinking has also convinced them that increased foreign exchange earnings through exports and remittances will help in keeping the current account deficit at $2.5bn.

Finance Minister Shaukat Tarin thinks containing the current account deficit somewhere between $2.5bn and $3bn should not be a problem. He thinks that a $26.8bn export target is “conservative” and the actual export revenue may hit the $30bn mark. Talking to a private TV channel after presenting the budget, he said the rising trend in remittances seen in 2020-21 could be well sustained next year.

Here is a question: can Pakistan actually meet the $31.3bn remittances target next year even if it witnesses thicker foreign exchange outflows on account of foreign travels and even amidst declining exports of workforce? Foreign travels and tourism may accelerate next year as globally Covid-19 is showing signs of weakening and travel restrictions are being eased.

Meanwhile, the number of Pakistanis going abroad for work has declined in the past 16 months, according to the Bureau of Emigration and Overseas Employment. In 2020, the number plunged to 224,705, obviously due to the Covid-19-induced global recession, from 625,203 in 2019. In the first four months of 2021, only 107,418 Pakistanis left for overseas jobs.

This lower export of workforce is likely to start affecting remittances’ growth in the near future. Besides, the dramatic rise seen in remittances in 2020-21 was primarily due to a strong rebound in the economies of host countries, like the United States and the United Kingdom, and the repatriation of savings of our diaspora in Saudi Arabia and the United Arab Emirates where hundreds of thousands of them lost jobs.

Thus, the situation in the next fiscal year might not be as favourable for remittances’ growth as it was this year. But the government is pinning all hopes on Roshan Digital Accounts. Overseas Pakistanis can open and feed these accounts in Pakistani banks while sitting abroad and use the funds deposited therein for investment in debt, equity and real estate markets of their homeland.

The government believes these accounts that have already attracted over $1bn so far will not let the growth momentum of remittances (up 29pc in 2020-21) subside. That makes sense. But then the government must also realise that the foreign exchange landing in these accounts and then invested in Pakistan (instead of going in the hands of the resident beneficiaries) is but foreign investment. Expecting a rise in foreign investment — partly due to a special conduit opened for overseas Pakistanis — is one thing and expecting the diaspora’s pure remittances to grow continuously is another. From the viewpoint of the overall balance-of-payments management, the investment portion of remittances (being a part of the financial account of the balance of payments) cannot play any role in containing the current account deficit.

And even if the current account deficit is contained at $2.5bn — or somewhere between $2.5bn and $3bn — Pakistan will still have to struggle in external account management. The reason is that the overall balance of payments remained negative by $3.56bn in the first 10 months of this fiscal year. The budget does not propose any measures to attract large sums of foreign investment next year.

The external debt financing requirement, meanwhile, will be higher next year than it was in the current fiscal year. That is why the budget for 2021-22 has earmarked Rs302.5bn (or less than $2bn) for this purpose — higher than the estimated Rs239.6bn for 2020-21. But this projection is based on anticipated external financing of $17.5bn that includes loans from the IMF, World Bank and Islamic Development Bank as well as commercial banks’ foreign loans, eurobond proceeds and international grants.

Though the deferred oil payment facility from Saudi Arabia has not been included in the projected external financing shown in the budget document, the government hopes to regain this facility next year. The finance minister confirmed this to a private TV channel, but refused to talk about the specifics. To some extent then the health of our external sector may remain dependent on geopolitics in the next fiscal year.


'No budget is perfect'

By Nasir Jamal

Textile exporters have termed the budget as growth-led and export-oriented with progressive initiatives to accelerate economic growth in the wake of the pandemic.


The PTI government has proposed an array of significant tax concessions for the businesses in the budget for the fiscal year 2021-22 as it switches gears to growth. It has also promised the exporters to continue the provision of energy to them at the existing concessionary, regionally competitive rates beyond June 2021. The business lobbies have mostly reacted positively to the measures suggested in the budget to decrease their cost of doing business and enhance their profits.

The Pakistan Business Council (PBC), a lobby group representing the large corporate sector, says the new budget will boost investment in the industry to further push exports.

“The budget addresses all major concerns facing the country: food security, employment in a Covid-impacted economy, external account balance and funds for socio-economic development,” PBC CEO Ehsan Malik said in his comments on the budget proposals.

“It addresses the issue of the disproportionate tax burden on the industry, talks about broadening the narrow tax base and seeks to boost growth, which, in turn, will generate more revenue for development spending,” he added.

‘The industry is disappointed that most of the recently withdrawn tax exemptions at the behest of the International Monetary Fund are not reversed’

He said no budget is perfect, and no single budget can cure all the ills of the past. “This budget is no exception. The industry is disappointed that most of the recently withdrawn tax exemptions at the behest of the International Monetary Fund are not reversed in the budget. The surest way to infuse investor confidence is to provide consistent policies.

“Overall, this is a positive budget. The litmus test of its success will be the speed with which jobs and disposable incomes rise and how quickly the cost of the essentials decline.”

The Overseas Investors Chamber of Commerce (OICCI), which represents foreign investors operating in Pakistan, termed the budget proposals growth-oriented. OICCI Secretary-General Abdul Aleem says the government has focused on the ease of doing business and facilitating manufacturing in Pakistan in the budget owing to limited fiscal space and the continuing Covid-19 challenges.

“The rationalisation of custom tariff on a large number of imported raw material will have a positive impact on the manufacturing industry.” He was glad to note that the government has also announced some bold measures towards broadening the tax base including incentivising the retail sector with tax credit for using Electronic Point of Sale machines.

“A few key matters are not addressed, or only partially addressed, including the continuation of the minimum tax regime as organisations with large turnovers but low-profit margins would continue to be subjected to turnover tax, which raises their tax liability to twice the normal tax rate. While no new incentives have been announced for new investment in plant and machinery or specific incentives for foreign investors the overall sentiment is towards ease of doing business making budgetary measures, by and large, business-friendly,” he concluded.

Textile exporters have termed the budget as growth-led and export-oriented with progressive initiatives to accelerate economic growth in the wake of the pandemic. “The new fiscal plan has set in place pro-growth measures to maximize industrialisation, create jobs, increase revenue and attain higher export growth,” Pakistan Textile Exporters Association chairman Muhammad Ahmed said, teeming the budget a step in the right direction. “Now the challenge for the government is to execute it in letter and spirit.”

However, according to him, the budget does not give a roadmap for disbursement of exporters’ old refunds pending since before July-2019. “Besides no funds are allocated for the revival of sick units which could help in fetch extra $1 billion in foreign exchange and create additional thousands of new jobs.”

The budget is believed to be very beneficial for the equity market. “From the equity market perspective, the budget is a positive one, where various incentives have been offered to businesses/capital markets,” Fahd Rauf, head of research at Ismail Iqbal Securities, said.


Jubilation on Pakistan Stock Exchange

by Dilawar Hussain

Several analysts say the 2021-22 budget is positive for cement, steel, power, automobiles and fast-moving consumer goods.


Capital market experts are happy. Many were seen beaming with joy. Even the grouchiest of them could find few reasons to be unhappy.

A fund manager said he believed the budget was a thing to celebrate. “Refusing to cede to the International Monetary Fund’s (IMF) demands to raise taxes in the stiff economic conditions and the pandemic clouds hanging overhead, even a static budget with no new levies would have been good enough,” he said, adding that the budget-makers had been bold to offer relief where possible.

The long-lingering demand of the Pakistan Stock Exchange (PSX) regarding the reduction in the rate of capital gains tax (CGT) was not altogether set aside by the finance minister perhaps because he is himself a figure of the corporate world. The exchange had asked for the CGT rate of 10pc for a holding period of up to 12 months and no CGT for a holding period of more than 12 months. The budget-makers took the middle way and reduced the CGT to 12.5pc.

Farrukh H Khan, CEO of the PSX, termed the budget “positive and progressive under very difficult circumstances”. He reckoned that the document was growth-focussed, which was the need of the hour, and appreciated the initiatives to reduce harassment of businessmen by tax officials and grow the tax base. “We thank the finance minister and the Federal Board of Revenue (FBR) for accepting many of the PSX proposals,” he said, requesting them to reconsider the tax credit for initial public offerings (IPOs). He said it had no significant revenue impact and was very important for the documentation of the economy and capital formation.

Brokerage houses offered little difference in their observations on the budget. Foundation Securities commented that the budget was positive for the equity market as it decreased CGT rate by 2.5 percentage points along with the abolition of 10pc withholding tax (WHT) on margin financing. “The continuation of construction-related relief measures such as subsidy allocation of Rs30bn for Naya Pakistan Housing Scheme… would bode well for construction-related sectors.”

The brokerage expressed concerns over the abolition of tax credit on PSX listings, which would be negative for growth in the stock market. Moreover, the imposition of a petroleum levy to meet the tax revenue target will be inflationary in nature.

Arif Habib, former chairman of the PSX, believed the budget was business-friendly and pro-growth. The finance minister had tried to cut down the cost of production and lower the cost of doing business by sticking to his stand on the electricity tariff and the reduction of customs duty on raw materials that would lower the cost of production. He mentioned bringing down the CGT rate and the withdrawal of WHT on margin financing as incentives for stock investors.

Mr Habib expressed his concern over two issues that escaped the eye of budget-makers: “Steps and incentives to encourage the documentation of construction and housing industries have been ignored. Secondly, quick refunds of stuck-up sales tax and income tax should have received attention since hundreds of billions of rupees are ploughed back into the industry to fuel industrial growth,” he reckoned.

Global Capital CEO Muhammad Kamran Nasir said the PTI government presented “a very balanced and pro-growth budget amidst too many challenges”. The striking feature, he said, was that the existing taxpayers who carry the major burden of taxes for the national exchequer were not burdened with new taxes.

Mr Nasir appreciated the “abundant incentives” for various sectors across the board in terms of cuts in customs duty/WHT/CGT/turnover tax.

Topline Securities in its comment on the budget said it was “mostly positive for the Pakistan equities” where the key win for the stock participants was the reduction in the CGT rate. The brokerage pointed out that the finance minister had hinted in his speech at the possibility that the rate might be reduced further in coming years. The government has proposed to delete the 10pc WHT on NCCPL margin financing and remove the 0.2pc WHT on members of the stock exchange. The reduction in the turnover tax rate to 1.25pc from 1.5pc and cuts in customs duties and additional customs duties on various sectors were also encouraging for the market.

It pointed out that there were no major developments in the following areas: no change in the corporate tax rate, no change in the tax on dividend income, no change in the tax rate on intercorporate dividends and no change in the sales tax rate of 17pc.

Several analysts said the 2021-22 budget was positive for cement, steel, power, automobiles and fast-moving consumer goods. Cement and steel sectors will benefit from the relief measures offered to the construction sector and the enhanced PSDP allocation. The budget was also positive for banks due to the removal of WHT on banking transactions and withdrawals, which may support deposit growth.

It was slightly negative for fertiliser and exploration and production sectors.


Pakistan Economic Survey: Light at the end of the tunnel?

By Jawed Bokhari

Pakistan’s poverty levels are determined by the interplay of economic growth rates, inflation and employment levels


Despite the government efforts to control inflation Finance Minister Shaukat Tarin concedes that prices are still high and affecting the common man.

To alleviate the sufferings of the vulnerable, he told a news conference while launching the Pakistan Economic Survey 2020-21 that “we will intervene and take care of the poor.”

The headline inflation measured by the Consumer Price Index (CPI) declined to 8.6 per cent during July-April against 11.2pc in the same period last year, according to the survey document. However, in May the inflation rate rose to 8.9pc against the annual target of 6.5pc.

An Ipsos survey conducted on June 8 showed that since August 19, 2019, inflation has remained the topmost concern of the common citizens, closely followed by unemployment and then poverty, electricity prices and increasing burden of taxes etc. Eight out of 10 people feel less confident about their job security.

Mr Tarin explained that the country had become a net importer of agricultural products and the prices were bound to go up due to a surge in prices in the international market. He quoted comparative prices of various prices and observed that the increase in domestic prices was, however, far less than the international prices.

The finance minister wants to tackle inflation by enhancing domestic production and that is why, he says, the next year’s budget focuses on agriculture. Though the annual target was met, the growth of 2.8pc in agriculture was slower than 3.3pc of last year.

In the meeting of the National Economic Council earlier this month, the advisor on reforms Dr Ishrat Husain is reported to have argued that adequate measures have not been taken in the development strategy to contain inflation and address issues of unemployment.

To quote research reports, Pakistan’s poverty levels are determined by the interplay of economic growth rates, inflation and employment levels. As far back as June 2015, an International Monetary Fund study titled Causes and Consequences of Income Inequality —a Global Perspective rejected the ‘trickle-down theory’ and demonstrated that “increasing the income share of the poor and the middle class actually increases growth while the rising income share of the top 20pc results in slower growth.”

In Pakistan despite the liberal stimulus package, growth in private sector investment was only 6.6pc this fiscal year against 10.3pc in the comparable year 2018-19. In fact, the total investment-to-GDP ratio has declined slightly from15.3pc in 2019-20 to 15.1pc marked by a sharp drop in foreign direct investment

Mr Tarin says the common man has been crushed by the stabilisation programme and promised dreams of trickle-down benefits of economic growth.

He told a journalist recently that “once the small- and medium-sized enterprises start to grow as well, once the supply chains for large scale manufacturing start to pick up and once housing construction gets going, that is when the real impacts begin to be felt by the common man. At the moment the construction of housing stock has not begun. That will come in six months to a year.”

Dwelling on the employment situation he said 52 million people were back to work in October 2020 after Covid-19 and only 2.5m were left unemployed. But about two million people enter the job market every year.

While the policymakers have been trying to evolve, as they say, the ‘bottom up’ strategy it looks puzzling that poverty figures were not published in the survey document. The United Nations multidimensional poverty index shows 38.3pc at the poverty level.

The survey did acknowledge that the country was facing difficulties in optimal social spending such as health care, education and housing etc.

There is also a view that the skewed structural distribution structure and policies are the major reasons for common citizens’ plight and lower growth rate. The survey document reveals that in the past two years, tax exemption hit the record of Rs1.34 trillion in 2020-21, up from Rs972.4 billion in 2018-19. The real beneficiaries have been the rich.

Production and growth economists point out that the mode of distribution cannot be overlooked. “The evidence is unmistakable and the conclusion is inescapable: a divorce between production and distribution policies is false and dangerous. The distribution policies should be built in the very pattern and organisation of production”.

That was what Dr Mahbubul Haq wrote in 1972 after the 1971 tragedy and is quoted in a recent article by economist Arshad Zaman — something which he says is no less relevant today.



Caught in the middle

by Khaleeq Kiani

Many proposed policy measures are highly inflationary, such as taxes on crude oil, LNG imports and food items.


Deep pockets had the 2021-22 budget their way. They secured incentives, tax breaks and subsidies in the name of trickle-down effect.

The purported spinners of the trickle-down list in the budget included manufacturing, oil refining, pharmaceutical, financial, steel, leather, auto and cellular phone segments.

The vulnerable and the poor got the benefit of the purported Riyasat-e-Madina’s compassion and the bottom-up support direly needed after the devastations caused by the two years of real negative economic growth amidst an unprecedented pandemic.

The lower middle and middle classes remained at the receiving end: revenue generation to finance both trickle-down and bottom-up support measures will be through higher taxation on petroleum products, crude oil, gas and electricity to name a few. Some exceptions here were nominal increases in salaries and pensions of government employees.

In broader terms, the budget appears to be the PTI government’s prelude to the next general election because of its focus on politically motivated schemes that will unleash a spending spree and the efforts to appease the industrialists and corporate brokers that have remained financiers of past elections.

But in a balancing act to raise revenues and at the same time keep the International Monetary Fund (IMF) on its side, the government has proposed certain measures that are highly inflationary in nature and can ultimately antagonise general voters.

The budget documents suggest that the government has said adieu to fiscal discipline and set aside around Rs350 million for each treasury member by proposing Rs68 billion under the Sustainable Development Goals Achievement Plan (SAP) — a term coined years ago to camouflage the funding for the politically motivated projects after a ruling by the Supreme Court of Pakistan banned discretionary spending. The practice is still ongoing but under a name that was meant for ending global poverty and hunger.

Strangely, such allocations have been made on the instructions of Prime Minister Imran Khan who vehemently criticised similar but significantly smaller doles during the PPP and PML-N governments. He had been terming it a political bribe to lawmakers at the public expense. The quality of utilisation of such funds has always remained questionable and mostly goes to waste.

Similarly, huge funding is also allocated to various ministries to finance projects being recommended by politicians and members of the cabinet and provincial assemblies. These allocations are largely made under the finance and inter-provincial coordination divisions.

As a result, the Public Sector Development Programme (PSDP) has been increased to Rs900bn, which is Rs200bn more than originally conceived for 2021-22 in March this year and 40pc higher than the current year’s revised spending of Rs630bn. Consequently, the size of the budget is Rs8.48tr — higher by Rs1.4tr or 19pc from the one that former finance minister Dr Hafeez Shaikh and the IMF agreed to. This indicates the government has adopted a fiscal expansionary policy in the second half of its term.

Surprisingly though, nearly 47pc of this will be financed by adding more loans to an already high and unsustainable debt level. The federal budget deficit is estimated at Rs3.99tr — up Rs553bn or 16pc from 2020-21. In terms of GDP, the federal budget deficit will be equal to 7.4pc — slightly higher than the current year’s level. Despite the IMF programme, the federal deficit is set higher for the next fiscal year.

The real challenge for the government is the implementation of the budget. Its success hinges upon the FBR’s ability to achieve the Rs5.83tr collection target. The FBR’s failure will mean reversing the first step that the government has taken towards addressing the core issue of high indebtedness. There will then be little funding available for political projects. The IMF had initially asked Islamabad to set the tax target at Rs5.96tr that was subsequently revised down by Rs134bn to Rs5.83tr.

Many proposed policy measures are highly inflationary like taxes on crude oil, LNG imports and food items and a higher sales tax rate for locally produced dairy and edible items, which are in addition to withholding taxes on certain levels of electricity consumption. The budget imposes a 17pc sales tax on the import of crude oil to generate Rs38bn. Its inflationary impact will flow into every important consumable and daily-use item, including sugar that will now be taxed at a retail stage and its price will go up by about Rs7 per kilogram.

This will make the next fiscal year’s 8pc inflation target challenging given the fact that other taxation measures like a Rs30 per liter petroleum levy will also increase the cost of transportation, farming and electricity. The government’s desire to remain relevant in the constituency politics and also continuing with the IMF programme may eventually cost it dearly as the middle section — between the big business and Ehsaas-supported poor — feels the pinch of a higher cost of living and shrinking purchasing power amid falling real incomes.

The finance minister believes the incentives for the industry, agriculture and big businesses will have a trickle-down impact on the middle class through job creation and better income levels in two to three years while some relief can reach both lower and middle classes through quota allocations in essential items via reforms in the Utility Stores network. “I do not have the chaddar to give more to everybody. We have exhausted our (fiscal) space.”

In the next few days and weeks, the challenge for the finance minister will be to strike a balance between the IMF’s demands and various lobbies. The performance in the first quarter may determine the revival of the IMF programme again in the September review. Until then, the programme may remain in the doldrums.


How did the last year impact the middle class?

by Fatima S Attarwala

Annual Business and Finance survey shows that the last year had a mixed effect on the middle-income group.


The last year had a mixed effect on the middle-income group. The annual Business & Finance survey, titled "Managing finances post-Covid", which assessed the income and spending of the middle class was answered by 850 respondents across Pakistan. Its result indicates a shift towards higher income brackets for those who remain employed while others suffered a loss in household income.

While middle-income group patterns remained roughly constant in 2018-19 and 2019-20, last year saw a decrease in the category of households with income of less than Rs100,000 and a 12 percentage point increase in households with income of more than Rs200,000.

Presumably, the middle-groups that emerged with jobs/incomes intact were able to do well because of the growth in the economy. The increase in government salaries of the lower cadres, along with a bump in corporate salaries may be why a higher percentage of respondents reported an income above Rs200,000 than in previous years.

Another reason could be that working from home allowed people to dabble in multiple avenues of income.

Though some middle-income respondents saw a jump in their household budget, a whopping 44pc reported a decrease in income and 32pc respondent’s income remained constant. Only a quarter of the respondents reported an increase in income.

Of those households whose income had witnessed a decline, one in four reported a loss of more than 30pc.

The good news is that a slightly higher percentage of respondents reported a bigger bump in household income than last year. Of those whose income did increase, one in ten reported an income increase of more than 30pc whereas one in four reported a bump of less than 10pc.

The pattern of the last three years has been a movement of an increase in kitchen expenses. This is in part because of inflation pushing up the prices of foodstuff and in part the higher incomes of some resulting in higher consumption of luxury food items.

The marked rise in utility bills can be clearly seen over the last three fiscal years. In 2018-19, one in eight people had a bill of less than Rs10,000, but in the current fiscal year, this has shrunk to one in four.

Every second respondent has suffered from an increase in health expenses since the pandemic broke out, indicating that the number of cases has been underreported.

Health expense has increased for half the population since the pandemic. One possible explanation is the lingering effects of Covid-19 and hospital bills paid by credit cards that keep eating into the household budget.

More or less, the spending patterns on education has remained constant. It appears that regardless of whether the other expenses get affected, parents of the middle-income group cushion education expenses to the best of their ability.

Income tax is another graph that belies facts on the ground. There was no substantial impact on income tax in the last budget yet people are perceiving that they are paying a higher amount in taxes.

While the saving patterns are roughly the same for the last three years, those who were in the habit of being heavy savers appear to have increased the amount put aside for a rainy day.

The trend in most categories has remained constant, however, housing patterns have changed entirely in the last two years. About 51pc of the respondents do not have a housing expense in terms of rent or mortgage. For the rest, the proportion of rent payers in the category of above Rs40,000 has increased while the category of less than Rs20,000 has decreased by six percentage points. Perhaps, this is an indicator of rising real estate prices that are pushing up rentals since housing finance was supposedly made more accessible. Or maybe, accessibility to housing finance has turned more families to purchasing houses and hence are paying a mortgage that they weren’t before.

Transport patterns are harder to understand. The pattern indicates that a higher percentage of respondents are spending more on transport costs and not less, which begs the question: who is travelling where while most of the country is under lockdown for the better part of the two years?

Similarly, the entertainment trend is hard to understand. The category of spending more than Rs15,000 on entertainment has seen an increase over last year. Surely, Netflix and other streaming services expense alone cannot explain it. Is it that when the restaurants are allowed outdoor dining facility people make hay while the sun shines?

Disclaimer: The B&F team has tried to intuitively interpret the results of the survey. However, responses may be subject to bias in respondents which skews identifiable trends.